Official data also showed the 2008-09 recession was deeper than originally thought and the worst downturn since the second world war. Revising previous numbers, the Office for National Statistics (ONS) halved its GDP estimate for April to June this year to just 0.1%, suggesting the economy had already ground to a halt before the European debt crisis escalated in the summer.

Economists warned that already-downgraded official growth forecasts were under threat. The shadow chancellor Ed Balls seized on the data as evidence that the British economy had "stagnated since the autumn of last year, well before the eurozone crisis".

"They should set alarm bells ringing in Downing Street and the Treasury. They show things are even worse than we thought and that the economy has not grown at all for nine months," he said.

"David Cameron and George Osborne urgently need to realise that spending cuts and tax rises which go too far and too fast have hit consumer confidence, killed the recovery and pushed up unemployment."

In contrast to Cameron's message to the country not to become paralysed by gloom, there was more evidence that consumers have reined in spending as they fret over job cuts, rising prices and the economic outlook.

The ONS said household spending dropped 0.8% in the second quarter, its sharpest decline since the depths of the recession at the start of 2009.

Services sector picks up

With a bleak European outlook, the Bank of England is expected to step in soon with another £50bn in electronic money to shore up the economy. But after separate news on Wednesday that Britain's dominant services sector defied market expectations and enjoyed a mild pick-up last month, the decision over whether to extend quantitative easing (QE) right away is likely to be finely balanced.

Growth across the UK services sector – which accounts for more than 70% of the UK economy – quickened in September, recovering from a sharp slowdown in August, according to a monthly survey of purchasing managers conducted by Markit and the Chartered Institute of Purchasing and Supply. The seasonally adjusted index, which measures activity across the sector, rose to 52.9 in September from 51.1 in August. Economists had been predicting a reading of 50.5, barely clear of the 50-point mark that separates expansion from contraction.

But companies remain deeply worried about spending cuts and the general economic outlook, with business confidence at it lowest since early 2009 when Britain was mired in recession.

Meanwhile, similar surveys in the eurozone on Wednesday showed deeper woes. Italy's services sector shrunk at its sharpest pace for more than two years in September while Germany's service industries have slipped into contraction territory for the first time since July 2009.

The Bank's monetary policy committee meets on Wednesday and Thursday but analysts say it may wait until next month, when it has its latest economics forecasts to hand, to launch more QE.

"We believe it is only a matter of time before we see more QE," said James Knightley at ING Financial Markets. "We favour November as the announcement point ... given close proximity to the US Federal Reserve and European Central Bank policy meetings and the Cannes G20 summit. Being seen to act in some kind of co-ordinated fashion may also give the stimulus more bang for its buck, rather than going it alone currently in what are very volatile markets and a mixed environment for data."

The services survey is closely watched, given that the sector dominates the UK economy, with businesses ranging from hairdressers to insurers. Commenting on the details of the purchasing managers' index survey, Chris Williamson, chief economist at Markit, said the headline reading "masks the fact that all is not well in the UK services economy".

"Growth of new business will need to pick up in the coming months to prevent a downturn in both business activity and employment in the final quarter of 2011," he said. "Companies are already reluctant to take on extra staff, with employment more or less stagnating in September, as worries about the economic outlook at home and abroad intensified."

Double-dip threat

With the threat of a double-dip recession worrying their members, some of Britain's biggest business lobby groups have urged the monetary policy committee to step in with more QE, which involves buying government bonds from banks to boost their finances and improve lending rates.

Policymakers with have to weigh growth concerns against persistently high inflation, but several members of the committee have indicated in recent speeches that more QE will come soon.

For the government, the latest GDP data did not bode well for its borrowing forecasts, said Howard Archer, chief economist at IHS Global Insight.

"The current softness of the economy is particularly bad news for George Osborne. The chancellor's 2011-12 public sector net borrowing requirement target of £122bn is based on the economy growing by 1.7% in 2011 and by 2.5% in 2012. It is widely accepted that these growth forecasts are far too optimistic. There is absolutely no chance that the 2011 projection will be met, while the 2012 growth forecast is looking more fanciful by the day."

Commenting on the GDP data, a spokesman for the Treasury said: "The economy is recovering from a recession we now know was deeper than we thought and the deepest of any major economy except Japan.

"Add to this the high levels of debt, particularly in the financial sector, which has been a drag on growth for the past six quarters, and it is clear that the recovery was always going to be difficult."